Kratos agrees to buy Henry Brothers for $45m

FAIRLAWN, N.J.—The agreement, announced Oct. 6, that Kratos Defense Security Systems would acquire Henry Brothers Electronics for $45 million started with a tap on the shoulder at ISC West.

“That was where I was first introduced to the idea,” Jim Henry, CEO of Henry Brothers told Security Systems News. “The guys from Imperial Capital [John Mack, Jeff Kessler, Michael McManus] had been noodling on the potential synergies between the two companies before they approached me at ISC West. We were not looking to sell at that time.”

Henry was convinced to meet with Kratos during the show in Las Vegas and “I found it intriguing.” That led to “some social visits in April and in June we started to get into more serious discussions.”

Henry said a visit to Kratos headquarters, and in particular, meeting with Fred Thomas, formerly of DelMarva, an integrator from Delaware whose family-owned business was purchased by Kratos years ago “gave me the level of assurance that [Kratos] knows our business and our industry.”

“Too many deals are put together just with the numbers. You’ve got to meet the people, see the operation and see if the culture fits,” Henry said. “That’s so critical to success in this industry, which is a people business.”

Fortunately, said Henry the culture and the numbers worked.

“I really think it’s a great deal for the shareholders, the customers, the employees. It’s not often you find two companies that really seem to fit so well.”

The agreement, a $45 million cash deal, or $7 per share, is currently in a 40-day “go shop” period. This means that other suitors have an opportunity to come in with a better offer, and which the Henry Brothers board would then consider. The deal is expected to close within 60 days, Henry said.

Henry and other members of the board of directors collectively hold about 60 percent of the company stock and they have agreed to vote their shares in favor of the merger. In addition, Henry has said that after the transaction closing, he will purchase Kratos common stock in the open market at prevailing market prices using a portion of his share of the proceeds from the merger.

Kratos on Oct. 6 announced a public offering of 2.3 million shares of its common stock at a purchase price of $10.20 per share. It expects to raise $24.6 million, which it will use to buy Henry Bros.

Michael McManus of Imperial Capital—which advised Henry Brothers on the deal—said the proposed merger would create “a very interesting new dynamic,” noting that the two companies combined “create a business that’s in excess of $100 million in revenue.”

Henry Brothers does work for the New York Mass Transit Authority, World Trade Center and other major government and commercial entities, while Kratos has a strong presence with the DOD, McManus said. “This creates a strong security integrator with a focus toward large-scale commercial or government entities,” he said.

The merged company “would be a pretty good alternative to the large multinationals for U.S. federal, state, local or municipal governments to contract with.”

Both Jim Henry and Ben Goodwin, Kratos president, Public Safety & Security Solutions Segment, say the scale of the new company will work well.

Ben Goodwin said Kratos was attracted to Henry Brothers because “they are clearly the leader in the systems integration marketplace.” With Henry Brother’s customer base and Kratos embedded presence in military bases across the country, “between Jim and I working together .... [it] will open up new opportunities in the public sector where we’re both strong, [in the private sector], and also on the defense side.”

Henry said that when he took Henry Brothers public in 2001, “we were an $11 million company and we anticipated growing to a $50-$60million company within a few years.” He said he realized that to “really flourish you’ve got to be in excess of $300 to $400 million company. There are a number of ways to get there and this [merger] is a lot quicker.

Kratos—which provides mission critical products, services and solutions for United States national security and is headquartered in San Diego—is a $450 million company overall with a systems integration business that does about $40 million. Henry Brothers does about $70 million to $75 million, so together the company would do about $125 million.

There are some projects, which Henry Brothers is technically capable of executing, “but you need the financial size to go after and execute on these projects,” Henry said.

Both Henry Brothers and Kratos systems integration are committed to expanding the service component of their business. In 2009, service accounted for 10 percent of Henry Brother’s business. The RMR Henry Brothers derives from managed services and larger maintenance agreements is a “really nice fit with Kratos’ service on the DOD side,” Henry said.

“We are cut from the same cloth, we have the same culture, philosophy of business, geographically, we are where they are not. This is not about redundancy and overlap. This is about growth and scale.”